Aon Hewitt projected that in 2011 that health insurance increases will be at their highest in five years. I hear it every month at renewal time, "Steve, I am tired of paying all of this money every month to a health insurance company. What other options do you have for me ?" Well for starters - let's take a look a at previous post of mine that details a bunch of strategies an employer should consider to help control their costs. One of these options was self funding.
I know, I can hear you already - " Our business is too small to self insure our health insurance." perhaps that is the case but a recent survey by the Kaiser Family Foundation shows that 16% of companies with less than 200 employees are self funded - this is up from 10% back in 2003. In fact the same survey indicates that 59% of covered workers are in a self funded plan. I think part of this increasing trend may have to do with employers looking to avoid some of the anticipated expenses associated with health care reform requirements in the Patient Protection and Affordable Care Act.
What exactly is self insurance ? Quite simply a self-insured or self-funded health insurance plan is when the employer pays for each claim as they are incurred instead of paying a fixed monthly premium to an insurance carrier every month.
Self-funding has the potential to reduce costs, avoid state mandated benefits, give employers more control, offer plan design flexibility, provide detailed claim information and even improve your cash flow. Sign you up you say ? Not so fast.
There are potential disadvantages too - the biggest being you, the employer, are assuming a much greater risk. A few large, unexpected medical claims show up and you better be sure your company has the financial resources to meet the cost of them. Or you better have some built in protection - see "reinsurance" below.
Perhaps you are a little intrigued by the concept but still aren't sure how it actually works. In general terms, self-funding contains three parts:
1) Employer pays medical and prescription claims - as mentioned above, you take on the risk - not the insurance company....up to a point (in most cases).
2) Reinsurance (or stop-loss) - most employers will pay a premium to a reinsurance company to pay for claims that go over a certain level. This level is set on a per person basis - for example $100,000 max payout per person - after that the employer is not responsible for anymore claims that year for that person and the reinsurer takes over. In addition, you can purchase reinsurance on an aggregate basis to establish a cap on the total dollars you are willing to pay out - such as $1 million dollars.
3) Third Party Administrator (TPA) - Who is going to administer all of this ? You pay a fee to a TPA to handle things like produce enrollment materials, adjudicating claims, paying doctors (with your money) and preparing reports.
According to report from the Employee Benefits Research Institute in 2007 there were "73 million American workers and dependents covered by a self insured health plan." Does that mean it is right for you ? If you have less than 50 employees then probably not (but you can talk to me about Health Reimbursement Arrangements instead). If you are a mid size employer then you may want to consider it. In fact, sign up to learn more at an upcoming seminar we are having here at IFS. Register here for this free seminar.
See you then!
Steve Blewitt, GBA Vice President of IFS Benefits Steve is licensed in Life and Health in many states. Steve is actively involved in the National Association of Health Underwriters, National Association of Insurance and Financial Advisors, Delaware Society of Human Resource Management, Associated Builders and Contractors of Delaware, Delaware Contractors Association, Delaware State Chamber of Commerce, and New Castle County Chamber of Commerce.
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